You may need to calculate your gross income if you're applying for a mortgage or qualifying for a credit card, among other reasons. Lenders typically ask for your monthly gross income instead of your annual gross income to help determine if your monthly budget can sustain a monthly loan payment. But on the flip side, the Internal Revenue Service uses your yearly gross income as a starting point for calculating your annual tax liability. You'll use one of two gross income formulas, depending on whether you receive a salary or you're compensated on an hourly basis.
Gross Income Meaning
To define the gross income that you receive each month, consider all your income sources. You may only have one source of income in the form of a paycheck from your employer. But you may also receive monthly income from your side business, public assistance or Social Security payments. And if you have investments that pay dividends, that's another source of income.
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Gross income is the amount of your total monthly income and other payments that you receive each month before taxes and other paycheck deductions, such as benefits and voluntary contributions. Your gross income includes earned income (such as wages, salary and tips) as well as unearned income (such as dividends, rental income and interest income).
Gross Income Vs. Net Income
If you kept all your gross income each month without having to pay taxes and other paycheck deductions, you'd probably have a lot more disposable income at your fingertips. But your gross pay becomes reduced after taxes and deductions are subtracted from it, leaving you with net income – also called your take-home pay.
Calculating Gross Income
To compute gross income, first determine how you're paid. If you're paid a salary or other annual compensation that is consistent each month, such as a pension, you'll use a straightforward formula to calculate your gross income.
But if your wages are calculated on an hourly rate of pay, and your work-hours vary each week, or if your income fluctuates each month because, for example, you're an independent contractor, you'll use a different equation to calculate your gross income.
Calculating Salaried Gross Income
The gross income formula for workers who have an annual salary is:
Gross income each month = annual salary divided by 12
For example, your monthly gross income is $4,000 if you make $48,000 each year ($48,000 divided by 12 = $4,000).
Calculating Hourly Pay Gross Income
You'll have just a little more simple math to perform if you're paid on an hourly basis or if your income otherwise fluctuates each month. You may need to give your best-guess estimate to the number of hours you work if your work schedule varies each week or if you regularly work overtime hours. If you worked for the same employer last year, and your number of work-hours and pay rate are basically the same, you can use last year's total gross pay and divide it by 12 to project what your monthly gross income for the current year will be.
Your gross income formula is:
Gross income each month = (hourly pay) times (hours per week) times 52 divided by 12
Here's a real-life example. If you earn $15 per hour, and you work 40 hours each week, your gross weekly income is $600 per month. Multiply $600 by 52 (weeks per year) to get a total of $31,200. Now divide this total by 12 to calculate your monthly gross income of $2,600 ($31,200 divided by 12).